Minimising lifetime tax with drawdown

handful

I have been retired for 2 years now and have been fortunate to see my SIPP increase significantly whilst drawing down my personal allowance via an UFPLS and we have also done the same with my partner's SIPP. (We are aware there is a fair chance her SIPP won't fill PA for the whole time until SPA) We have topped up to our spending requirements from an ISA/other savings.

So we have avoided income tax completely so far but with my SIPP pot growing I'm now thinking of drawing down a higher amount to maximise the basic rate band until SPA. I'm thinking better to utilise the Basic Rate band for the next 3 years to hopefully reduce chance of hitting 40% bracket if my SIPP keeps growing and allowances are frozen or bands changed.

Is there a calculator available to assist or an expert in this field that could offer some advice as to what is the right strategy?

Some numbers below for context

Me first

64 this month and full SP in 2029.

DB pension triggering £20k TFC and £3k pa from this month

Sipp of £500k (up from £400k since retirement 2 years ago)

ISA 93k (up £10k since retirement 2 years ago)

Premium bonds £39k

My partner

61 with full SP in 2032

Sipp of £122K (Maintained value despite 2 x UFPLS withdrawals since retirement 2 years ago)

Premium bonds and savings bonds £46k

Many thanks for any opinions

DRS1

One thing which gets discussed on here is drawing from your SIPP to contribute to your ISA. That may be worth considering if you think you may be drawing from the SIPP at higher rate tax in the future.

You don't say if your partner has an ISA - maybe the savings bonds are in one? But if she has no ISA you could draw from your SIPP to feed her ISA (well some people do that).

The general idea is that you keep the same investment in the ISA as you had in the SIPP. But of course you don't have to do that if you are afraid of an investment downturn.

handful

https://forums.moneysavingexpert.com/discussion/comment/82018896#Comment_82018896

Yes, If I do take a higher UFPLS and pay some basic rate tax then I would put this extra cash into an ISA and would probably open one for my partner as well to utilise the ISA allowances fully. I'm just not sure whether to "volunteer! to pay some Basic Rate tax now or just kick that can down the road for as long as possible but then maybe trip up with 40% tax later!

MK62

Without knowing your desired income level(s), it's impossible to give a specific answer tbh.

Generally though, I'm not sure it's a good idea to pay BR tax now in an attempt to avoid HR tax in the future unless you are fairly confident your income requirements will actually take you into the HR tax bracket at some point down the line…….and trying to guess future tax policies, rates and bands is difficult at best. Given your age and current financial position, to me it would seem unlikely you'll hit the HR tax threshold (assuming your drawdown levels are reasonable given the size of your pension pot).

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82018922#Comment_82018922

As above , even if you add the state pension on ( when you get it) it seems unlikely you will have £50K of income pa, or even close to it.

handful

https://forums.moneysavingexpert.com/discussion/comment/82018922#Comment_82018922

Thanks MK62.

I wasn't really concerned at all when I retired but I suppose the £100k increase in value despite 2 UFPLS withdrawals has got me thinking. I'm also mindful that if either me or my partner were to die then the single PA would then make it far more likely that one of us could hit the higher rate. We are currently living off around £42k but have made some "one-off" purchases, solar panels, motor bike, some furniture.

phlebas192

£36kpa DB plus a full SPA will likely fully utilise the BR tax band given inflation growth and freezing of the tax bands. So any taxable income you withdraw from your SIPP after that can be expected to be taxed at 40%. Therefore it probably makes sense to draw more now at 20% and put it into ISA(s).

One proviso to this is that if you die before 75 then your beneficiaries can access your SIPP free of income tax. So if health is an issue it isn't as clear cut.

nb: you say "partner" rather than spouse. Doesn't really make any difference to withdrawal strategies, but IHT could be an issue. eg if you die after next April and before you are 75 then a spouse / civil partner could get your SIPP and other assets totally free of all tax but if left to a common-law partner then only the first £325k would be free of tax with the rest attracting 40% IHT.

NoMore

@phlebas192

£36kpa DB

I too made that mistake, everybody else is reading it as 3k pa not per month for the DB, which tbf is what the OP does state.

phlebas192

https://forums.moneysavingexpert.com/discussion/comment/82019048#Comment_82019048

Oops, yes. But if it is just £3k pa then I don't see the issue. OP is never going to come even close to higher rate tax with any sensible withdrawal rate from their SIPP..

NoMore

https://forums.moneysavingexpert.com/discussion/comment/82019081#Comment_82019081

Yep, thats basically what everybody is saying.

mrklaw

look beyond income. Are you expecting/hoping to have enough spare to gift to family or for larger one-off purchases? help with a car for kids or a house deposit gift are the sorts of things that can easily spike into 40% tax if you’re not careful. If you know thats something you want to do - gifting while still alive rather than leaving it to inheritance, then 15% effective tax vs 30% (assuming you have tax free available) can be something to consider